Come Hell or Highwater – The Enforceability of Absolute Contractual Obligations Amidst Global Sanctions

Introduction 

A “hell or highwater” clause is an absolute promise in a contract requiring a party to perform its obligations no matter what difficulties or external disruptions occur. It is often used in financing arrangements, where it applies to payment obligations.

In GTLK Malta Four Limited v Pola Maritime Limited and others [2026] EWHC 2514 (Comm), the UK courts had occasion to consider the limits of a “hell and highwater” clause in the context of a vessel financing and charter arrangement. How absolute is the nature of the legal promise, especially against the backdrop of increasing disruption caused by the proliferation of global sanctions?

The defendants in this case sought to avoid payment obligations under a guarantee, arguing that the underlying charters had been terminated or frustrated by the imposition of sanctions. The court upheld the payment obligations, finding that they would survive the frustration or termination of the charters in light of the “hell and highwater” clause. The clause also served to allocate risk of loss of use of the vessels, leaving no room for the doctrine of frustration to operate in respect of that allocated risk.

This Update provides a summary of the decision and highlights the key takeaways for contracting parties, particularly in the context of finance charters.

Brief Facts

GTLK Malta Four Limited (“Claimant“) was the registered owner of seven vessels (“Vessels“). The Claimant was a subsidiary of JSC GTLK, an international transport business wholly owned by the Russian Federation. Between February 2018 and April 2020, the Claimant entered into seven separate substantially identical 10-year charterparties in amended BARECON 2001 forms with Pola Logistics Limited (“Pola Logistics“) (“Charters“). The Charters formed part of a financing arrangement under which the Claimant financed the acquisition of the Vessels, Pola Logistics repaid that financing through charter hire payments and had rights to acquire ownership of the Vessels.

The Defendants entered into 12 materially identical Joint Deeds of Guarantee and Indemnity (“Joint Guarantees“) under which the Defendants were joint and several guarantors of Pola Logistics’ obligations under the Charters. The Charters contained a “hell or highwater” provision (Clause 38.10), which provided that Pola Logistics’ obligation to pay hire was absolute notwithstanding, inter alia, any unavailability of or inability to use the Vessels.

Following the imposition of EU, UK and US sanctions on entities within the GTLK group in 2022, Pola Logistics ceased paying hire and asserted that the sanctions had deprived it of the use and enjoyment of the Vessels, frustrated the Charters and entitled it to terminate the Charters. The Claimant rejected the purported termination and maintained that hire remained payable under Clause 38.10 of the Charters.

In September 2023, the US Office of Foreign Assets Control (“OFAC“) granted specific licences (“OFAC Licence“) in the US which permitted payments under pre-existing contracts to be made into blocked accounts. On 28 February 2024, the Claimant terminated the Charters for non-payment of hire and demanded payment of the Purchase Option Price pursuant to Clause 46.2 of the Charters. When neither Pola Logistics nor the Defendants made payment, the Claimant brought proceedings and applied for summary judgment against the Defendants under the Joint Guarantees.

Issues

The Court identified four issues: 

1. Construction: What was the proper meaning and effect of the relevant Joint Guarantees and, in particular, did they continue to apply even if the Charters had been frustrated or terminated?
   
   
2. Termination: If the Charters had not already been frustrated, did the Defendants have a real prospect of establishing that Pola Logistics validly terminated the Charters on 1 September 2022?
   
   
3. Frustration: Did the Defendants have a real prospect of establishing that the Charters were frustrated by impossibility or impracticability, or discharged by supervening illegality following the imposition of sanctions in 2022?
   
   
4. Suspension of hire: If the Charters survived, could the Claimant establish that Pola Logistics’ obligation to pay hire was un-suspended by the grant of the OFAC Licence on 18 September 2023 such that hire was due and unpaid when the Claimant terminated the Charters on 28 February 2024?

In addition to the abovementioned issues, the parties disputed the true nature of the Charters, in particular whether they were properly characterised as finance charters.

Holding

The Court granted summary judgment for the Claimant and held that the Defendants had no real prospect of establishing that the Charters had been frustrated or validly terminated, or that they were not liable under the Joint Guarantees.

Before addressing the four principal issues, the Court considered the issue of the nature of the Charters. The Court accepted the Claimant’s position that the Charters were finance charters and held that this was central to the allocation of risk, particularly through the “hell or highwater” provision in Clause 38.10 of the Charters. As finance charters, the commercial purpose of the arrangements was not merely the use of the Vessels, but the repayment of the financing advanced by the Claimant. This supported the broad interpretation of Clause 38.10 of the Charters, under which the risk of unavailability or inability to use the Vessels was allocated to Pola Logistics.

First, on the construction issue, the Court held that the Joint Guarantees responded even to the Defendants’ arguments on frustration and termination. The Court rejected the Defendants’ distinction between “accrued” and “unaccrued” obligations. Clause 2(b) of the Joint Guarantees required the Defendants to pay as principal obligors while Clause 2(c) imposed an independent and primary obligation to indemnify the Claimant. Applying the reasoning in IDBI Bank Ltd v IDH International Drilling Holdco Ltd (formerly known as Essar Shipping & Logistics Ltd) [2021] EWHC 1908 (Ch) and Gulf Bank K.S.C v Mitsubishi Heavy Industries Ltd [1994] 2 Lloyds Rep 145, 151R, the Court held that the Joint Guarantees allocated to the Defendants the risk of Pola Logistics’ failure to perform its payment obligations under the Charters, even where the obligations were alleged to be unenforceable or invalid. This was consistent with the commercial purpose of the Charters as finance charters. Further, the purpose of Clause 38.10 of the Charters was to ensure that hire continued to accrue, notwithstanding events that might otherwise affect Pola Logistics’ obligations. Accordingly, once there was a failure to pay hire, the Claimant was entitled to terminate the Charters under Clause 28(a) and the Defendants, standing in Pola Logistics’ shoes, were obliged to pay the Purchase Option Price under Clause 46.2 of the Charters.

Second, the Defendants’ frustration argument failed. Even assuming in the Defendants’ favour that the Vessels could not be used, frustration could not be established. When the sanctions were imposed, the Charters had between five and eight years left to run. Applying the “wait and see” principle established in The Sea Angel [2007] 2 All ER (Comm) 634, the Court held that the sanctions had not, at that stage, radically altered performance under the Charters. Further, any illegality affecting Pola Logistics’ payment obligations was merely suspensory, rather than destructive, and therefore incapable of discharging the Charters. Importantly, the Charters were characterised as finance charters and Clause 38.10 of the Charters expressly allocated the risk of loss of use to Pola Logistics. Accordingly, there was no room for the doctrine of frustration to operate in respect of that allocated risk.

Third, the Defendants’ termination argument also failed. The Court rejected the Defendants’ argument that Pola Logistics had validly terminated the Charters by reason of the Claimant’s alleged breach of the quiet enjoyment covenant under Clause 42 of the Charters. The Court held that Clause 42 could not be read in isolation and ought to be read together with the other provisions in the Charters which deal with the parties’ agreed allocation of risk. Since the Charters allocated the risk of the unavailability of the Vessels or the inability to use them to Pola Logistics, Clause 42 could not be interpreted so as to reallocate that same risk to the Claimant.

Lastly, on the suspension of hire issue, the Court recognised that sanctions could suspend, rather than extinguish, the obligation to pay under the Charters. Although the OFAC Licence arguably reduced the effect of the sanctions by permitting payments under pre-existing contracts into blocked accounts, it was unnecessary for the Court to separately determine whether, and to what extent, the grant of the OFAC Licence had revived Pola Logistics’ obligation to pay hire. Having concluded that the Joint Guarantees remained enforceable and that the Defendants had no real prospect of establishing frustration or valid termination of the Charters, the Court held that those findings were sufficient to dispose of the Defendants’ case.

Takeaways

The decision illustrates the difficulty of relying on sanctions to frustrate long-term financing arrangements where the relevant risks have been expressly provided for under the contract. The Court particularly emphasised that the Charters were finance charters, under which the commercial purpose was the repayment of financing advanced for the acquisition of the Vessels, and interpreted the provisions of the Charters against that commercial background.

The decision also affirms the effectiveness of “hell or highwater” clauses in allocating the risk of loss of use or inability to operate an asset to the charterer. Where such risks have been contractually assumed, there is little scope for the doctrine of frustration to operate.

Further, the Court’s treatment of the Joint Guarantees demonstrates that broadly drafted guarantee and indemnity provisions may continue to respond even where the underlying contractual obligations are alleged to have become frustrated, terminated, unenforceable or illegal.

If you have any queries on the above, please feel free to contact our team members set out on this page. For regional Shipping & International Trade matters, please see Rajah & Tann Asia’s Regional Shipping Practice for more information.